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What will Apple Do ?

While we all wonder what the content companies will do going forward with Google and Youtube, you have to wonder what Apple is thinking and how they will respond.

They have to be sitting their with eyes wide open as they watch 3 of the major record labels sign some sort of deal with Gootube that rewards them with 40k shares of stock each, worth more than 15mm dollars that from appearances will allow Gootube to offer music videos for free from the Gootube site.

In the past, offering free music videos would not have been perceived as a big deal. Music videos are just commercials for the sale of CDs ? Right? Wrong. That notion is “so last century” to paraphrase some commentators these days. The days of Music Video as commercial ended when Ipod added video. A downloaded music video file with full fidelity vs a downloaded music song at full fidelity song can sound exactly the same on an Ipod . Of course there are sometimes little differences from video to song to make the video more entertaining, but nothing that would make the song any less enjoyable when listening on an Ipod or other portable media device, and there is the value of watching the video itself.

Apple has realized this, and as a result priced music videos at $1.99 and songs at 99 cents.It worked for them too. It used to be that most people who wanted to acquire music legally and easily went to Itunes Music Store(ITMS). According to Apple on their latest conference call, ITMS is 85pct of all legal downloads in the US. On that call, Apple also said that “ITMS was run above break even with the primary goal of selling more IPods and accesories.” But what was more interesting to me was their mention that Music Sales were flat quarter to quarter. Apple said this was due to seasonality. Time will tell if thats the case

While it used to be ITMS was the path of least resistance to legal music downloads in the past. That position is quickly being replaced by Youtube. As i have written earlier, its just too easy to convert the music videos that Youtube downloads to my computer over to Ipod format. ITMS has lost business from me. I believe they are losing business across the board. While some people think that its too much hassle for most people to do the conversion, that problem is disappearing quickly. A cottage industry of software apps is being built around Youtube. Its getting easier by the minute to download music to your IPod .

But thats not the worst part of it for Apple. Apple had pretty much flipped the notion that it was impossible to compete with free. They had done a great job of making it easyto buy anything short form, music, video, whatever. But they were competing with companies that were purposely in the background for fear of being sued. People who used bitorrent, grokster, limewire did and do know they were getting their music illegally.

Its different on the video hosting sites like Youtube, Grouper, etc. The owners of the sites all make the point as loudly as they can that everything they do is legal. Then Youtube is bought by Google AND they do deals with the music labels . So everything and anything that happens on Youtube must be legal. So forget going to ITMS for music. Lets go to Youtube. Its perfectly ok to convert the music Youtube downloads to me over to my IPod (of course if youtube and google truly were legal in their videohosting, there never would have been a reason to do a deal with these music companies at all, would there ? )

It will definitely impact the sale of online music and music videos. But more importantly for Apple, it wrestles away control of music sales from Apple and opens the door for MicroSoft for their new Media Device, and for any other Portable Media Player that supports video. The number one application MicroSoft should ship with Zune or make sure is available from a 3rd party for free ? A Youtube downloader. Just read the quicklist on Youtube, and download to your Zune. Fast, friendly, free music just for your Zune. Why spend 99c or 1.99 per song on ITunes when its free for your Zune!

All the music you can eat, Google pays. How great is that ! Not so great for Apple.

Apple is smart enough to have picked up on all of this and Im sure Steve Jobs and Eric will have a nice little chat about it.

And while we are on the topic, I think the music labels got the better part of the deal with Google. Three companies, $50mm dollars. You have to sell a lot of music on ITMS to net $50mm dollars. Im not saying it was a bad deal for Google. It was probably only 120k shares. They wont miss that. But the devil is always in the details.

It will be very interesting to see just how long the deals were for. Was it just till the end of the year ? Time enough to see if the new Content Filtering Software application works ? Was it 1, 2 years or longer ? Personally, I would be suprised if it was longer than a year. If that is the case, then the music labels pimped out their music video catalogs for 15mm plus a share of ad revenue per year, each ! Google in essence, “prebought” every download that would have been sold over at Apple and gave it away for free without any DRM, and they gave up a pct of their ads. Again, not a terrible deal for GooTube unless the music labels expect to be paid the same amount every year.

So we could have an interesting year of watching Apple to see if this change in where music is discovered impacts their competitive situation. Watching the labels to see how much they can get paid for licensing their catalogues. Will it be 15mm plus ad share per year or get sued ? What will other content providers who didnt get their 15mm think ? Will they sue to prove a point that you cant leave them out ? Will Google just write checks or give stock to the entire universe ?

Speaking of lawsuits. It will be very interesting to see how the Universal suits against Grouper and Bolt play out. Grouper has already said they are on firm ground. I of course dont agree. I think they will get nailed. It will be interesting to see if Sony gives them money to fight the fight. I also think that Universal will settle with Bolt.com . Im just guessing here, but if Im them, knowing Bolt doesnt have deep pockets, I make them settle on the exact terms of how Doug Morris wants to see video sharing sites deal with copyright. I would make bolt.com the poster child for what video sharing sites have to do to be in compliance and avoid lawsuits from Universal and by proxy the other music labels and most likely other content providers. Using bolt.com to get that level of control and a public admission that the Safe Harbor provisions of the DMCA dont apply will help Universal far more than any financial settlement or from forcing sites like Bolt.com into bankruptcy and getting nothing

Tell the World Please !

43 thoughts on “What will Apple Do ?”

Look at the http://sourceforge.net/projects/zunemytube/. This is an IE plugin that allows users to download videos from YouTube and Google Video that can be played on Zune and other Windows Media portable video players like Archos. All you do is set up the “My Videos” directory for sync’ing with the device. Then when you like a video on YouTube or Google Video, just click on the Zune icon to download the video in “My Videos” directory and off you go.

Good points, Mark. While many argue that ”Apple always seems ahead of the curve” or that ”Apple likely has a plan to counter Google,” and while that has largely been true up to the present, it is also true that eventually the numbers and percentages catch up with you. Even the Rolling Stones, who once sang ‘Time Is On My Side,’ now know that likely Ambrosia was closer to the truth when they sang ‘Time Waits for No One.’ While Apple has been a defining and driving factor behind many of the innovations that have impacted modern culture over the last 25 years or more, it is only a matter of time until the numbers and percentages catch up with you. It’s a tough position to be in, always having to live by vision and hold the leadership position because of it. Eventually, corporations — no matter how innovative and visionary — become part of the very process/paradigm they once opposed. For many, the Apple ‘rebel base mentality’ has been supplanted by a corporate culture that would be the very target of the Macintosh ‘1984’ commercial that once defined the free spiritedness that drove Apple innovation. Increasingly, Apple stands more and more alone as they drive off one more former ally after another. Even their move to Intel is not an automatic ‘green light’ with developers, many of whom have grown to mistrust Apple’s latest rounds of moves over the last few years. Often, innovation springs from smaller third-parties playing on the periphery and along the sidelines. Over the years, Apple has created an environment where there are fewer and fewer of these ‘new’ voices — voices which are now increasingly being heard in the Windows world — and this 23 year Apple user finds himself looking more and more at the innovations coming out of the Windows developmental world. As a music producer and magazine publisher, Apple always held a strong affinity with me but as the world turns and time pushes Apple’s onetime rebel camp disposition far into the past, I find myself increasingly weighing the thought that the Apple sandbox has grown just too small and limiting to wish to stay and play any longer.

In the days ahead, I expect to see Flash (which at its heart is more akin to what the promise of JAVA was to have been, than it is to a graphic format only) hold the high ground through all of this. I highly doubt that Adobe fails to see the need for greater audio prowess in Flash. With its near-hegemony in the market, exceeding both Quicktime and Windows Media combined, YouTube and just about every other site will continue to feed Flash’s vitality in the market. And whereas Apple and Adobe were once joined at the hip as co-pioneers in a technological/creative revolution, those days are gone and lately it’s been more a case of witnessing an ugly divorce among two friends, whom you each like. But just as in life, it is quite rare to remain friends with both and eventually you major on one and minor on the other. In that, I can imagine a world without Apple far easier than I can a world without Adobe.

The cottage industry that you mention that has grown up around YouTube is but one example of areas wherein ‘expanding your sandbox’ is a good thing — but in the world in which I work and function, Apple has been aggressively shrinking the size of its ‘third-party sandbox.’ Moves like that which have been made by Google/YouTube and others, show that the world of Apple/iTunes is far from the rebel base of yore and like you, I can now keep some of my money in my pocket — not all, but some.

Dr. Eric Schmidt – CEO – Google recently joined the Apple Board of Directors and Google’s admiration of Apple is no secret.

Apple will be releasing the iTV (tentatively titled) first quarter ’07 to stream video content from computers to the television set. With the buddy buddy Google/Apple relationship, and Jobs claiming that iTV will have video from Google Video (and now You Tube) I see a rosy future iTMS somehow integrated with Google’s cache of video content be it DRM or Creative Commons.

I must disagree with your idea that music promotional videos stopped being adverts when apple started selling them.

It’s simply not true.

Apple don’t plan to make money from selling music videos, no more than they planned to make money from selling music on itunes.

They’ll make money on selling video ipods.

The plain reality is that most record labels still see promo videos as a pain in the butt. They cost a lot of money, but they do help sell a single – which also doesn’t make any money for the label – and then sells an album – which does make the label money.

The smart labels are beginning to add value to DVD albums by creating mini movies to go with the album music. Smart move and an exciting, creative avenue that, imho, will transform the concept of what an album is.

The reason Apple are selling music vidoes is because it’s the easiest video content to get. Which is precisely the same reason gootube went after music video content first. It’s not because they are no longer adverts. It’s because they *are* loss leading flyers/adverts and therefore easier to license.

I enjoy your blog, but, I felt it worth pointing out this because in Europe we have the Geek 7 (7 tech/mobile companies) fighting to reduce royalties on music. Not because they want to make money selling music, but, because they know if music is available, on tap, 24/7 for next to nothing…they can sell consumers more gadgets, upgraded mobile phone accounts and more services.

Let’s face it.

It’s a very simple business model and reminds me of how yer man Rockerfeller gave Chinese people a free oil lamp. What trech. companies want to do is the opposite..i.e. give the oil away for free so people have to buy a new lamp.

I think Apple makes more money selling iPods than music on iTunes. It’s a nice service for iPod users and makes it seamless to download content. I’ve yet so see another service that’s so well implemented.

Another side of this equation is the tools Apple sells for content creators. This is was Apple is counting on since they have a huge margin of profit in selling the tools.

I don’t think they want to deal with the copyright issues that GoogTube is dealing with currently. They are better off providing the tools that creative folks use to produce the content, whether it’s for YouTube or iTunes. Either way they win.

I think the main problem is quality and ease of use. YouTube is great for goofy little videos of your friends, but not if you want to listen music to it in your iPod. Well, maybe Justin Timberlake fans won’t know the difference, but those with some sort of actual musical taste will. But then again, mass America cares more about quantity over quality…

Essentially YouTube is just a bunch of video podcasts. If I were Apple, thats the direction I would head – the same direction they did with podcasts but this time with video. Allow users to upload their own videos – just like YouTube – even if it’s recorded off of TV. Keep it lower quality – just like YouTube. But keep charging for the higher quality stuff like Music Videos, TV Shows, Movies, Music.

*Side note- (i.e not an Apple response) Gootube gave the record labels shares. Which means, not only is Google now interested in protecting itself from lawsuits (as previously discussed) while driving this model forward but, three record labels now sure as hell don’t want to see those shares go South either. It’s one thing to get cash in hand and walk away. The record label deal isn’t that. In this case, the shares of stock promote a different behaviour and allow the 3 labels an incentive to try to grow that strategy successfully . Simple market methodology – the higher that price goes, the more that cash out deal at some point is worth, dividends, etc. So, if the record labels want to figure out how to cash in on this model (given that, they certainly know there’s 100’s of ways videos and music are transferred daily) didn’t they just get an upfront payment to trade off for the copyright lawsuits? I mean, they would now only be taking from themselves. In addition to that, the more people submit their “illegal” material to the public domain via GooTube, look at the $ coming into Google for advertising and look at what happens to the share price………. unless I’m missing something here, it just means the companies doing the advertising and paying GooTube for hits/views (~downloads) are now paying for the latest music and videos FOR me. **That is what I consider a shift in how advertising can be effective.** If I know that everytime I download a new song or video on my iRiver and I see the advertisement for the Mavs on the page, I know the Dallas Mavericks just paid for my choon…therefore, sign me up with a brand new jersey and season tickets as a way to say “Cheers Mark, I’m here to support your company in return! Just keep on advertising with Google!” Google pays the record companies with an increased stock price and probably some cut of cash… and I can keep the downloads going. Now if a disruptive technology shift can do the same for my mortgage payment…

I think Apple makes the argument for Gotube. When napster came around and got spanked for copyright infringement real business men (Apple) took a good look. And essentially proved that if done right people would pay for internet content (music,video, etc). To answer your question, remember that Apple is making money NOW. Gotube is still not profitable. I think the question is still what is Gotube going to do.

Perhaps I don’t understand this completely, but what is too keep me from taking songs I legally own, putting them to a generic video of say, squiggly lines (or even just a black screen) and uploading that to gootube? The real issue is making the encoding easy for anyone to do. Napster turned things upside down back in the day. I would fully expect to see a program in the future that will take any song you have, put it to generic video, upload it for you, and help you search for others with the same program and formatting of songs. From the same program it’s easy to rip the audio or you can just keep the generic video that looks like media players hypnotizing screen. I would think that the recording industry is looking ahead to something like this. It’s really only a difference from sharing mp3s in file type and method. Does this agreement with Google indicate they are conceding that it’s a losing battle to stop file sharing and trying to phase into other methods of making money?

So the music industry makes $11B in CD sales per year but the annual TV ad spend is $70B. It makes a lot of sense to me that Google would pay a lot of money (currently $15M per year as predicted by Cuban) to each label to secure rights to this music for YouTube user/publishers.

I bet that the artists and the labels would prefer YouTube users to have better fidelity for their lip synch tracks. Discovering new music will driven by a watch me listen to music and dance culture that would gladly see a few Google ads to give them real safe harbor.

Apple make their money from iPods, not iTunes. There will always be people who want the convenience and the polish of iTunes. If the rest want to go and RIP their music and videos from YouTube, does Apple care? It couldn’t give a damn. The more content people download, the more they’ll want to use an iPod. Whatever happens, its good for Apple.

You raise an interesting point about content ownership. Im not half has comuter savvy as you, therefore, I dont know how to transfer Apple files to a non Apple deviceand vice versa. What I do know is that I am not too fussed about paying 99c per song, as long as its mine to keep. On SpiralFrog, youll have to sit through 90 second ad clips, and moreover, your content self destructs after 6 months!?

Forget it. Music defines peopleespecially younger people. You think theyll give up their ownership so that then borrow free music for a limited amount of time?

Finally, circling back to your last and very interesting blog re: music companies and ownership. The only reason why music labels have owned their artists in the past is because they were the only distribution channels available. Now, you can just leverage iTunes distribution platform and sell to millions of people. Furthermore, whats to stop advertisers from reaching out directly to artists, in effect cutting off the middle man?

The service music companies provide is limited beyond distribution and promotion. And with online outlets being built, YouTube & Co. are taking care of the promotional part.

The argument that YouTube is somehow bad for Apple is completely missing the point of the iPod ecosystem. As Apple gladly says, sales from ITMS are marginally profitable at best, and not designed to bring in 20-30% margins as are iPods & Macs, nor the 40% margins of most accessories, not to mention the off the charts margins for AppleCare. Jobs and Co. is smart enough to accept that as much as 100% of the content on your media player will NOT come from Apple. That’s ok so long as the media content is feeding itself into a Apple controlled ecosystem – which as of now only includes iPods and PCs, but will soon add the television via iTV (or whatever name is finally adopted). Anyway, the long and the short of it is that the wisdom from One Infinite loop was realizing that the content portion of tomorrows media devices will be all over via the internet. So they determined to reverse the Gillette method of marketing, and give away the blades to sell the razors. If you choose to not accept their giveaway, yet still buy their razors – they have made the same end gain. More power to them.

From MC > Actually you are right. Its about the ecosystem. So if Google uses the music on Youtube to compete an ecosystem that rivals ITMS, why wouldnt they sell it to the highest bidder ? DO you think they will just play nice and put an ITMS link up ? Heck, maybe MIcrosoft and Google join forces . They can create a new music store for the MicroSoft Zune and call it GooZuneTight .And as far as competing with recording TV , radio to other posts, searching is a little different than waiting for a song to play and recording it like we did when I was in school.

I’m one of the founders for a website that sells music for local bands. http://somethinglocal.com We actually been pretty successful in selling music for local bands. We’re also about to launch a module that will provide a platform to sell music, photos, videos and a number of other services. Part of our market comes by avoiding DRM. We’re actually really excited at the content aggregated by GooTube and are anticipating Apple’s response.

Youtube is a youth thing, they’re the only ones with the time to rip stuff in exotic ways. Since the music business is already learning to live with napster’s offspring, they’ve probably conceded this. They’ll get everything they can from Itunes, but let Youtube go as a lost cause. It’s like controlled drugs (alcohol and tobacco). You have more control and can monetize the stream on Youtube. Clamp down, and everything is hosted overseas and you don’t get a cut of the profits.

This will change once the Internet fragments, China goes it’s own way, and the movie business gets really motivated to protect their HD content. HD is the end of the line. Lose that, and you’re done. No more Hollywood.

But I think the Youtubs of the world really are just going to send out checks. Is Sony going to sue itself? There are all manner of copyright images on bulletin boards, and that’s where these videos end up if you don’t allow this.

ITMS is all about portability, and soon, living room convenience. This is irrelevant to that.

The integration of the iPod and iTunes is amazing, but DRM is totally killing the party. If Apple could find a way to get rid of the DRM, I’d buy all my music from iTunes. YouTube is too wild and messy to interface well with my iPod. I’m not going to waste precious hours of my day converting music from YouTube or messing with its idiosyncrasies. In any case, the YouTube deal indicates that content owners are getting more comfortable with open content. I hope they will soon let Apple take the DRM off its music. Until then I’ll stick to importing cds.

I do not understand the “$50mm dollars” comment. Are you saying the 3 record companies will each get ~$17,000,000 from google stock? That doesn’t seem to be a lot, even if it is on per year basis. If iTunes Store is selling 1B songs a year, and from reports 65% of the revenue goes to record lables, that is $650M a year. If the majority of the songs are licensed by 5 major music producers, the 3 you mentioned will get a significant part of the $650M dollars. Where am I missing the numbers?

Micheal (above) is dead on; Apple makes money on the HARDWARE– sales on the iTMS are a “nice-to-have”.

Not only does Apple make money on the iPod, they happen to control the best software in the world for MAKING NEW videos, whether consumer level (iMovie) or pro level (Final Cut). Chew on that. The possibilities of an emerging Apple/Google collaboration beyond the famous Windows/Intel collaboration of the eighties staggers the imagination. Apple has ALREADY leveraged its Disney/PIXAR ties.

The main issue with converting Youtube videos to by ipod compatible is that anytime google choose, they can add a layer of encryption to the flash video and make it go from very easy as it currently is, to nearly impossible.

In fact, I can’t imagine Adobe not including copy protection of flash videos in the next release of the Flash creator and player software, and then any time after that Google can simply turn it on, with no impact on their normal mode of operation.

Oh and to answer the question about what will Apple do… I think they may partner with Google so that a “Buy this song from iTMS” appears. The bigger threat to Apple is the death of QuickTime as a medium for videos on the web. Think many people will still visit their movie trailers site?

I don’t think that’s a likely scenario Mark. As others have mentioned, if people wanted to do this, they could do it already through their TV. Heck, they could just have an audio in jack from the radio and go nuts. They could even record Internet radio, or subscribe to Rhapsody and rip them. You can already find music videos for many bands free on their websites or MySpace. I think exactly 6 people will do what you are describing.

The reason iTunes is so popular is it’s easy. You search, you click, and you are guaranteed a CD quality song. Best of all, iTunes synches it to your iPod super easy. Doing what you describe requires more effort. You have to figure out ripping software, you can only get songs that have music videos, you have to hope there isn’t sound effects in the video that ruin the song. Load it into iTunes, etc… There are still plenty of places to steal MP3s easily if people want to. iTunes is about simplicity and convenience.

From MC> Actually your internet radio is a great example. The DMCA has this thing called the Artist Complement. Do you realize that for ALL radio, internet or otherwise, its ILLEGAL to show the name of the song thats supposed to play next ? That its ILLEGAL to play more than 3 songs in a row from a single CD, and I think 5 from a single artist (you can check the DMCA for details). So compare waiting on a song, to searching for a video on Youtube, quicklisting it and then saving it to your Ipod

Outside of you, I have never seen or heard of anyone taking a YouTube video and converting it for iPod compatibility. I’ll give you credit if it takes off, but I think that the idea is too removed from peoples minds right now. I know you’re talking about the future, but I don’t see people grasping it. It’s not happening now: http://blog.guykawasaki.com/2006/09/is_advertising_.html

It seems that with Google throwing cash to the labels, the artists end up getting screwed. The labels gets money if they “look the other way” with all the free downloading. But in a legal download, a percentage goes to the artist. Downloading from YouTube, nothing goes to the aritst. So, the labels are up 50 million dollars but the artists are out on the street. That’s a pretty raw deal.

Who really watches music videos that much anyways. I dont know if there is a way to see how many Itunes has sold but i would have to imagine that it cannot be a huge number. I might be way off but it just doesnt make since to me. I think tv shows and movies is where its at.

The main problem I see with that is the large majority of songs don’t have videos. When is the last time you saw a music video for Frank Sinatra, Grateful Dead, etc? Also, with the new albums, usually only has a video for one or two of the singles from the album.

I think Apple has to have something in mind for this. With Eric Schmidt joining the board I have to assume that Apple knows exaclty what Google is planning. Google has just created a blog to show public commitment to the Mac. http://googlemac.blogspot.co/. Apple seems to always be a step ahead of everyone and I doubt that Steve will just sit there quietly. While i have no clue what the plan is for Apple I feel that it will come out just fine.